My favorite John Ralfe article is called “don’t cash in your final salary pension” and it contains this passage.
If you are wealthy enough — to the extent that there is no risk of running out of enough money before you and your spouse die, no matter what — then the pension guarantees are worth little and it may be sensible to cash in.
But most people are not so wealthy and their pension is a large part of their overall retirement wealth, so those guarantees are very valuable.
Despite eye-watering multiples for cashing in, do not think now is a clever time to take the money and invest in equities. The higher expected return of equities versus bonds is just the reward for the risk of holding equities. It is not a guaranteed “free lunch” or a “loyalty bonus” for long-term investors.”
John wrote his article shortly after Merryn Somerset Webb had written “If I had a final salary pension, I’d cash it in” and distinguished FT columnist Martin Woolfe had told us he’d done just that.
How can we reconcile our leading financial paper on the one hand advocating pension liberation and on the other filing report after report on the dangerous consequences?How can Jo Cumbo and Merryn Somerset Webb be colleagues?
Transfer windows
Last Friday was Brexit day, it was also #transferdeadlineday, the last day football clubs can transfer players in the “January window”.
Merryn’s article, written in 2016, argued that the opportunity for what John called “eye-watering multiples for cashing in” could be “the last gift you’ll ever get from the bond bull market”. As it turns out , the bond market continues to give us 40+ times multiples (a £10,000 pa pension often gives a transfer value of £400,000 or more) but the incidence of people transferring is falling fast.
The window for transferring is closing but not because the bond market is running out of steam, but because insurance companies are refusing cover (at economic rates) to financial advisors who want to advise on these transfers.
Insurers see the incidence of claims as too high and this is based on evidence of future claims they will be getting from the FCA and actual claims being upheld through FSCS.
The FT reported on the latest FCA statements on pension transfers and I reminded the FCA that in 2016 they had brought this issues to their public’s notice.
https://t.co/6cIy84DXMK FT have always been at the heart of this debate @MerrynSW
— Henry Tapper (@henryhtapper) January 31, 2020
Jo Cumbo was upset by this , thinking I was accusing the FT of hypocrisy.
That’s unfair Henry. We have run plenty of articles alerting readers to the cons of transfers, as well as the advantages. https://t.co/iFMixeRKmF
— Josephine Cumbo (@JosephineCumbo) January 31, 2020
and again
Over the past 4 years the number of articles / FT seminars highlighting transfer risks has far outweighed the few comment pieces highlighted. We’ve done more than most to highlight the unfolding mis-selling scandal.
— Josephine Cumbo (@JosephineCumbo) January 31, 2020
For the upset, Jo – sorry.
Should the FT be charged with double standards? OF COURSE NOT
It was not just Merry and Martin who were raising awareness, Ros Altmann did too. Ros’ position was clear and precisely the position that John Ralfe was advocating
If you are wealthy enough — to the extent that there is no risk of running out of enough money before you and your spouse die, no matter what — then the pension guarantees are worth little and it may be sensible to cash in.
Minutes after I had juxtaposed Merryn and Jo’s articles, I was speaking at the Institute and Faculty of Actuary’s Great Risk Transfer Debate to a hall full of actuaries some of whom had taken CETVs themselves.
I made it clear in my closing remarks that it was quite possible to support both Merryn and Jo’s positions for precisely the reasons laid out by John Ralfe.
Could I really accuse Ros Altmann, who has done more than anyone in Britain to publicise the need to protect the financially vulnerable, of deliberately provoking the practices the FT are now stopping?
Ros is quoted in Jo’s article in the FT this week
Almann’s position is consistent and so is Cumbo’s. What I told the actuaries was that they had every right to take on risk if they could manage that risk. However , where risk is transferred without proper explanation and due regard to the consequences, the risk transfer is BAD.
Horses for courses
I know of steelworkers, (Rich Caddy is an example), who knew the risk they were taking and are explicit in praising their adviser for allowing them the right to their money. The level of financial capability evidenced on the Facebook pages of the steelworkers is increasing and clearly some who took transfers are growing into the task of managing their money.
There are similarly people (like me) , quite capable of managing a CETV who chose not to. I prefer not to worry about the markets but to get paid a regular income and there are many like me.
“Financial Capability” is not the only measurement of suitability. Many successful entrepreneurs are deeply cautious retirement planners because they take their risks elsewhere. They may be brilliant in business but cautious on the home front. This is how I understand Paul Lewis’ decision to keep his retirement funds in cash.
The opportunity cost of not “investing” are enormous, but so is the deep satisfaction of knowing the money will be there, year after year. For me, it is another reason to stay healthy!
Rich Caddy and I are friends, but our behaviours are different. Rich has had a steady job in the steel-works and will have a retirement where he will play the markets, for me , it’s the other way around (without the steel works).
From Blackfriars to Port Talbot
Jo’s offices are a few yards from St Paul’s and a couple of hundred yards from where I’m writing this blog.
Port Talbot is a long way away from the City of London but Jo managed to make the steelworker’s pension decisions real to those in pensions.
Merryn and Jo represent two ends of the spectrum of this debate. Merryn advocates financial freedom for those who can handle it and Jo writes about the impact of dumping risk on those who have no means to handle it.
Society is not equal, we need Merryn and Jo, we need John Ralfe and Ros Altmann too.
Most of all, we need a proper understanding of this great risk transfer that has seen £80 bn flow from collective pensions to the personal management of individual citizens.
Thankfully , the IFOA are on the case and I hope that the debate they have started will lead to a better understanding of how we can travel from Blackfriars to Port Talbot and back again!
